Thursday, December 29, 2011

Planes Trains and Bombardier (competition)

   I talked about the jet segment before but what about trains, better known as Germany based Bombardier Transportation?

Yes, Bombardier is a top three player in the light jet segment with exactly 50% of its 2011 third quarter revenue (53% for nine month period) coming from the aerospace division ($2.3B up 27.8% from 2010) on net orders of 34 (up 48%) coupled with 68 final deliveries (up 33.3%) and a backlog of $22.3 billion (up 16%). The aerospace division relies sales of business aircraft which should be reassuring given that it's a global leader both in terms of revenue and units (43 business jets in the nine months up from 31 in 9M10). Business aircraft command relatively higher prices per unit and so that's also a key source of cash flow. By comparison, the leader in airplane deliveries, Boeing sold 127 planes (737's) for total sales of $17.7b (up 4%), earnings of $1.1b (up 31%); Only considering Bombardiers aerospace division, Boeing revenue was 7.7 times greater (profit 5 times greater) which is comparable to the market cap difference, however remember Bombardier only gets 50% of its business from planes, there's also the profitable train division from which it receives the other half of its revenue. In my opinion that makes Bombardier undervalued.
The Aerospace division is in the process of building its newest manufacturing plant in Morocco. The new plant will cost the company $200 million to build, be in construction mode for eight years but will begin manufacturing planes (and provide sub assembly capabilities) by 2013. By 2020 it will employ 850 workers.
In August 2011 Bombardier signed a deal (intent) with a major company in Russia for the sale of 10 midize CSeries aircraft for $660 million. The Russian deal may be a sign the company's larger aircraft business is about to take off or maybe I'm being too optimistic but keep in mind, the company's first 150-200 seater C919 series aircraft are on deck pending joint venture with China's Comac. January 19, 2012: PrivatAir SA becomes the eleventh company to order Bombardier's C Series planes after it entered into a contract for five 100 to 149 seater aircraft worth $309 million (and optioning another five for $327 million). The order, worth as much as $636 million brings the number of orders to 138 (262 including options) and first delivery of any of them hasn't even happened yet (end of 2012). Why are Bombardier's larger aircraft gaining popularity? Maybe it's the 20% improvement in fuel efficiency over existing planes. Lufthansa and Korean Air are two of the eleven companies with orders already placed. During Prime Minister Harper's trip to China in February 2012 it was revealed that Chinese private airline, Express Airlines is the Chinese company that purchased six 110-150 seater midsize CRJ900 NextGen planes back on October 29, 2011 for $254M. That company already uses 50 of Bombardiers older version of the model (CRJ200). The deal is significant since only about 80 Bombardier aircraft are currently in use in China. Depending on whether China Express picks up an additional five planes through an option agreement, the value of the deal could reach $491M.

Now let's look at the train segment dubbed Transportation. It is world's leading supplier in 7 of 11 product segments giving it a recognizable edge in the industry. As of October 31, 2011 the backlog is $33 billion (unchanged) or 50% more than Bombardier Aerospace not a great sign considering the difference was 75% at this time last year. Revenues of $2.3 billion in the quarter is steady with the previous period with any minor change attributable to currency effects (however in the nine month period revenue for the division is up 13%). Orders were down for the quarter and in the UK specifically, Bombardier Trains has contracted in size slightly, already beginning the process of cutting as much as half the workforce of 3,000, a plan conceived in July 2011 after failing to secure a key contract.
Part of the reason it struggled last quarter (orders down 57% in the third to $1.6 billion) is due to a controversial decision made by Britain's government in August to award a £1.4  billion contract to German company Siemens over Bombardier even though Bombardier would have built the trains at Britain's only remaining train factory in Derby (kind of ironic given that Bombardier Transportation is also based in Germany); that decision came only about two months after Germany chose Siemens over Bombardier for a £5bn contract. Another blow to the company happened the same month on July 25 when Bombardier made rail cars were involved in a massive bullet-train crash in Wenzhou that was ultimately blamed on design flaws. On the day of the crash, July 25 its stock fell 2.29% to 5.98; since then stock has fallen another 34.8% brining it down to 3.90 (by comparison Boeing stock is up 2.73% to 73.26, Embraer SA is down 15.0% to 24.95). I think investors overreacted to third quarter results, the company was banking on the contract and it wasn't really expecting to lose it given public opinion in the UK. Public opinion in Britain is continuing to pressure the government to support Bombardier's factory in Derby and really the only way for them to do that is to continue to award it key contracts which are also seen as job security for British workers. As recently as 2004 the company threatened to cut jobs at Derby but ended up not going through with it; it did however cut 7,000 jobs worldwide that year (since then the company's workforce has nearly doubled meaning the company is in a long term growth spurt).


The transportation division has strong support in India and America with new orders more recently coming from traditional customers in Chicago ($331 million order for 300 cars July 20), New Delhi ($120 million for 76 cars September 5) and Sao Paulo ($96 million order by mass transit September 21, 2011). Don't be fooled by third quarter results. During the nine month period the train division was the source of 53.1% of company revenue, $7.453 billion up 13.13% yoy with gross margin up 10.5% to $1.248 billion; That's 32.8% more than aerospace's $940 million.

Recent Good News
UK: December 28: Won a US$269 million contract to supply London South with as many as 130 Electrostar rail cars (adding to the 2,000 Electrostar models already in use there).
Germany: December 23 Receives new order worth US$648 million for 90 430 series electric trains to be used in Frankfurt. That's in addition to 87 others already ordered by DB Regio AG in 2011. The trains won't be delivered until sometime in 2014.

Over 100,000 rail vehicles presently in use around the globe, were built at a Bombardier Transportation factory. Bombardier rail equipment is designed and manufactured at 59 locations throughout the world however more than half of them are in Europe where 73% of its 35,000 employees work in 16 nations, with most residing in Germany (research is based in Switzerland). Outside of Europe, the company employs people in Canada (Ontario/Quebec), Australia, United States, and Mexico where Bombardier's newest Learjet plant was built. There's also India and China giving it a presence in Asia. In China the company has train and large commercial jet partnerships with local companies including newly formed Comac. For trains, Bombardier has three joint ventures and seven 100% enterprises in China, under which it manufactures propulsion equipment and signaling equipment. 13% of transportation 2011 fiscal revenue came from Asia. China is the focal point for Bombardier's future in the region which isn't a bad plan considering China plans to spend $434 billion on railway infrastructure between 2011 and 2015, that figure is the latest and is 41% higher than the previous one.

Bombarder remains a solid company in which to invest. It pays a dividend which has gone up every year for the past three years. The dividend has gone up from nothing in 2008 to 10 cents a share annualized in 2010 and is on track to reach 11.5 cents in 2011

Friday, December 16, 2011

Undervalued Blackberry Far From 'Game Over' (subscribers up 35% to 75 million, competition affects US market share)

   RIM is far from game over as implied by cnn's Paul R. Monica, not that he has a track record for giving blackberry credit when appropriate; for instance no mention of the 33% quarter to quarter increase in bb unit sales up to 14.1 million in the 3 months ended November 2011 (from 10.6 million units in the 2nd, 13.2m in the 1st quarter) putting it in record company territory or the 35% increase in subscribers over the last year to 75 million. (Globeandmail: Holding out hope in RIM’s hometown) RIM is also Canada's biggest R&D investor at $1 billion/year, Canada represents 11,000 of it's 17,500 workforce. It still holds a leading market share in Latin America 25.6% (Sept 2011, ahead of Samsung at 24%), Canada 36% (platforms, ahead of iPhone at 30.1%), Indonesia 46% (Sept 2011, 2nd is Android at 29%) & South Africa 70% (where Nokia takes 2nd place); Latin American share was also quoted as 28% in August (Argentina has all but banned iPhone sales however BlackBerries are allowed since RIM now manufactures in the country). In the UK Blackberry was in a virtual tie for 2nd place with Apple in 2011 after claiming 27.7% of the market (8.5M British BB subscribers). Another feature unique to the BlackBerry: alert settings ! Users are given more control over ringtone and volume settings as compared to the iPhone.

Things looking up for PlayBook! PlayBook now has 15% of the Canadian tablet market which is amazingly good considering it was just 5% five months ago. The change is attributable to losses in market share by Apple's iPad (now 68% from 86%) and the PlayBook becoming more affordable ($300 compared to $500 introductory price).  Later, in February 2012 Wordpress released an app that allows users to update/create blog content from the playbook tablet.  RIM still has a lot of work to do. Only about 1% of the global tablet market is held by RIM however the company is in an enviable position, the tablet market will grow by 43% in 2012 and much of the growth will come from the developing world where demand for BlackBerry products continues to be strong; First nine months of 2011 more than half of RIM's revenue came from countries outside the USA, UK and Canada (58% of RIM revenue which is up from 39% in 2010). Graphs, tables and general BlackBerry information can be found at more on BlackBerry In the first week of March 2012 BlackBerry's PlayBook outsold iPad at Canada's leading electronic retailers, Best Buy and Future Shop.

Rim is not Palm since Rim continues to have a definite market presence not only in America but globally with a 30% market share outside the U.S. (international market contributed $3.6 of $5.6 billion or 64% of revenue in the 1q12; that compares to 53% for Google) versus 9.2% within the USA (down from over 20% in 2010). Abroad, blackberry is particularly popular in Thailand (>33%) and Indonesia (46% up from 40%) where market share continues to grow even without the next generation QNX operating system being applied to any of its products as of yet (remember QNX alone is worth more than a third of RIM's market cap at present, the QNX product is unique, cutting edge with its technology already used by spacecraft and car guiding systems); In Indonesia there are 6 million blackberry users making it the most popular brand, in fact its popularity combined with a half price offering on the $540 Bold 9790 to the first 1000 buyers, was enough to cause a stampede in Jakarta in November; the strong showing for such an expensive phone is also exciting given that Rim has traditionally relied on the US market for sales of its higher end devices. Smartphones are on track to account for as much as 49.6% of all mobile device shipments to Thailand by 2015 up from the current rate of 17%, so as long as RIM maintains a top two position in that market it should see a significant boost to sales in the near future. In an effort to stem any erosion of market share RIM introduced its first touchscreen phone, the Curve 9380.

Update: BlackBerry and Java ME were the only operating systems to gain share during the month of December (keep in mind that Java ME was down for the year while BB was not); The figure considers all mobile devices even the ipad and other tablets (smartphones represent only about 25% of mobile devices worldwide).
Apple and Nokia's problems in Western Europe will give BlackBerry more opportunities which is great news for RIM considering it's not that far behind (1st quarter of 2011 RIM shipped 3.5 million blackberries to Western Europe, enough to give it a steady 16.5% market share in smartphones). 2011 saw a lot of new companies enter the handheld device market, that was enough to bring Nokia down from 1st place (40% share) to only a couple percentage points higher than 3rd and 4th place RIM and HTC (16.5% each), unlike Nokia RIM is holding onto its European market share. Android continues to dominate among operating systems, in the 2Q2011 51.9 million units were sold worldwide which represents 48% of the global market; Samsung led Android device makers at 17M.

RIM sold over 14M smartphones in the just ended third quarter which ties its record high of 14.2M in the quarter ended November 2010 (was about 25% lower than iPhone sales). For the year, Apple sold 70 million iPhones, 30 million iPads and 59 million other products. RIM also continues to attract the attention of major investment firms with NY based Omega buying up 1.43 million shares last quarter. In the just released quarter RIM posted earnings of 51 cents per share ($265m overall) and revenue of $5.17 billion in line with analysts expectations of $5.26 billion (with a 27.3% gross revenue margin/36.3% in the nine months). By comparison Motorola Mobility Solutions (mobile devices) with 38% more market cap, lost 10.7 cents per share (still independent Motorola Holdings with twice the market cap posted only 39 cents per share profit) last quarter while Nokia continues to post losses ($68m, $368m last two quarters, respectively). As of Nov. 26, 2011 total assets are $14.037b up 9.0% qoq with current assets accounting for half of all assets (down 3.8% to $7.2b but still up 20% from August 2010). As for Microsoft (the platform that Nokia has anchored itself to) it had trouble keeping even its 5.8% mobile platform market share.

RIM's encryption security, made even better in 2011 with the addition of Near Field Communications features to Java-based BlackBerry 7 Bold 9900, is so advanced the playbook, Blackberry's answer to the iPad, remains the only tablet endorsed for purchase by the US Federal Government (since July 2011). Additionally, blackberries are ten times more efficient than the competition when it comes to bandwidth usage which is one of the reasons they are doing so well in developing countries like Indonesia, where bandwidth is limited. RIM's leading edge security features
November 14, 2011: BlackBerry 7 phones awarded common criteria EAL4+ Certification meaning that the combination of security mechanisms and product design meets the highest level of accreditation. This applies directly to the BlackBerry® Bold™ 9900, BlackBerry® Torch™ 9810, BlackBerry® Torch™ 9860 and BlackBerry® Curve™ 9360. February 2012: Blackberry 7 operating system receives FIPS 140-2 (Federal Information Processing Standard) certification. The FIPS 140-2 certification for BlackBerry 7.0 and 7.1 gives the company bragging rights when it comes to encryption security. Since the award was granted all of BlackBerry's latest smartphones and Playbook tablet are now all certified by the FIPS program. FIPS is an award issued by the Canadian agency 'The National Institute of Standards and Technology (NIST) and Communications Security Establishments of Canada".

Platform diversity makes it easier for Android to compete BUT in the long term it will lead to new problems
Unlike the competition Rim is still betting mostly on its own devices and sotfware. Google is taking a more liberal approach; as long as device markers comply to the Compatibility Definition Document industry standard, they can use just about anything produced by Android. Platform diversity, something that RIM and Apple are more wary of getting into, is already beginning to have negative effects on Android in the form of Android fragmentation; Multiple phone manufacturers with one carriers apiece, simultaneously supporting more than one active version of Android. That has led to more troubleshooting problems and other hardware & software issues that are increasingly difficult to resolve due to there being less consistency across devices. Also a problem: Google can't address an issue as efficiently as say rim can because google doesn't design the mobile devices. As a result carriers are losing as much as $2B a year from phone returns/replacements; In fact during the 4Q2011 Sprint, the #3 US carrier reported a $1.3B loss, it sold 1.8 million iPhones and added 1.3M more net subscribers. There's also the issue of patents. Any patent infringement charged to Android affects all of device manufacturers that use it including market leaders like Samsung, HTC and LG.

Over the years Blackberry has improved battery life (fewer of the less popular apps, though next generation phones could require more power if they run on multi core processors), zooming/scolling (liquid graphics display), operating system speed (BB7 which runs the Torch 9810, Torch 9860 and Bold 9900 is 40% faster than BB6 and 100% faster than BB5) and screen resolution/display brightness. The company spent $369m on research & development an increase of 3.4% vs 3q2010.

For manufacturers relying on another's platform (Samsung/HTC on Android, Nokia on Microsoft) future patent laws could provide major stumbling blocks to growth; For example in late Dec 2011 Apple was granted a patent that can be used to keep HTC from bringing several of its newer Android products to the American market. That could eventually lead to other similarly used patents, severely limiting growth for companies without their own operating systems. (bgr: Apple’s new app-switching patent could be trouble for Android) Considering Rim is a patent rich company (1400 patents comprising at least $4B worth of intellectual property according to Bank of Montreal analyst Tim Long) it is in an enviable position. Google is also limited in how it handles troubleshooting problems since it doesn't design the mobile devices which run its operating system (one of the reasons Android phone replacement/repairs cost carriers over $2B a year that's much higher than at RIM & Apple. Apple update 1Q2012 - As of end of December 2012 Apple is selling iPhones at a rate of 285/minute. The company has $97.6B in cash and a 65% share of the tablet market (down from 90% a year ago). For carriers like Verizon and Sprint, carrying the iPhone is bittersweet; Since Verizon added the iPhone to its repertoire in late 2010 it has seen its ebitda margin decline to 42.2% from 46.4%, but at the same time it added hundreds of thousands of new subscribers (1.3M at Sprint).

My response to some of Paul's criticism;
Paul "There is no sugarcoating RIM's latest earnings report. The company warned that sales and profits for the next quarter will be far below already reduced forecasts."
Me - Nokia's earnings have reached nil and even google has reported reduced earnings (experienced 29% decrease q2q 1q11) proving that the success of a product is not directly related to earnings. Margins ARE being reduced industrywide (why Apple's iphone4S was rejected by the US's 6th largest carrier US Cellular because the product is not profitable, competition has reduced the profit margins significantly over the last year with new companies HTC and Samsung entering the market). Additionally, RIM's latest quarterly earnings of 51c/share also took into account a $485m loss attributable to unsold tablets & $50m loss due to the October outage, meaning smartphones didn't do all that bad (company's smartphone business makes up just over 50% of the market cap compared to just 2% for tablet division). Don't forget about the last of 2011 when Google's $864 million q2q increase in revenue actually translated into an earnings decline of 0.9% or 21M. In the same quarter, Apple's profits which amounted to more than $13 billion, actually exceeded Google's quarterly revenue by 23.4% ! Apple sold more iPhones during the last quarter than over the entire 2010 calendar year (285 iPhones sold per minute).

Paul "We now believe that RIMM needs to adopt an existing ecosystem (Windows Phone) in order to remain a relevant player in the smartphone market"
Me - Blackberry remains neck to neck with Apple in the corporate market with a near 40% market share. That means that blackberry's operating system is one of only two with widespread use in that market.
On Millenial Networks out of the top 20 handsets the ones that ran on Apple's operating system represented 12.55% of the market compared to 9.72% for blackberry. (Millennial: Android usage doubled iOS in Q3, iPad king of tablets with 456% growth). So blackberry's operating system remains a player even without the QNX upgrade. Blackberry continues to be even more relevant than Nokia and that's with Nokia (and Samsung) relying on other companies to provide them with an operating system (even Samsung doesn't run its own operating system - so if android or windows or iOS face encryption problems Samsung and Nokia can't do anything about it - can't downplay encryption security with 90% of US companies hacked in 2010).
Of the top 5 mobile original equipment manufacturers only Apple gained market share in terms of US subscribers in September versus June (10.2% vs 8.9%) proving once again that Rim is not the only company experiencing market share loss in the US (LG and Motorola lost about the same % share as Rim in the OEM category); but because the US smartphone market is still growing in size company sales aren't dropping as fast as market share would indicate. The reason it's taking RIM so long to bring QNX bb10 phones to market is because RIM has to rewrite the Blackberry Enterprise Server so that it's tailor made for QNX. Don't forget that Apple is losing market share quickly in Europe's two largest markets, Germany and France. Apple's situation in Europe is deteriorating quickly with the loss of patent wars in Germany. Though Android is gaining, particularly in the key market of France (nearing 60% market share), Apple's problems in Europe are giving companies like RIM more opportunity to expand.

Paul - Blackberry is irrelevant evidenced by earnings drop/market share drop
Me - That's an overreaction. All smartphone companies are seeing their profit margins squeezed due to higher competition (average blackberry phone price decreased from $362 in 2005 to $308 in 2010). Blackberry's sales stabilized in the 3Q of 2012 fy at $19.8B annualized (according to Brigantine) while sales of the newest Blackberries released November 15 were seen as healthy by Royal Bank of Canada. The market share drop is limited to just the US market which only accounts for 36% of RIM's revenue. Even so, the market share drop shouldn't be a concern given that blackberry sales remain near record high (quarterly) and subscribers are up 35% to 75 million in just the last year. Also to keep in mind the last quarter included $485 million in losses due to unsold tablets and another $50 million from the outage in October.
It also depends on what region you're looking at. Blackberry remains more popular than ever outside of the US, UK & Canada; Outside of that region revenue is up to $8.24B for the first three quarters of 2011 up 48% from $5.57B in the corresponding period of 2010; Meanwhile revenue from the US market was down 44% proving that BlackBerry's future lies beyond the US market. Without taking the non US market into account it's impossible to properly evaluate RIM.
What's more, Google's 1st quarter earnings drop of 29% (quarter to quarter) was not an aberration, profit in the quarter ended December 2011 fell slightly from the previous quarter ($2705m vs $2728m) even though revenue grew by $865 million.

Consider the 3rd Quarter of 2012
*According to ad Impressions RIM was the only company posing significant threat to Google and Apple in the connected device & smartphone mix on Millenial networks, with a 13% overall market share compared to 56% and 28% for iOS and Android, respectively. RIM also had the 3rd (Curve), 7th (Bold) and 9th (Torch) most popular mobile phones which combined to represent 9.03% of the market; out of the top 20 handsets the ones that ran on Apple's operating system represented 12.55% of the market compared to 9.72% for blackberry. As a manufacturer, RIM ranked 4th overall just behind HTC at 11.05% with 4.6X the market share of Nokia.

*Revenue from outside the USA, UK & Canada up 48% to $8.24B in the first nine months of the 2012 fiscal period. That region now accounts for 58% of total revenue up from 39% last year.

*Sales stabilized at $19.8B annualized for 2012. Sales of the newest blackberry models were healthy according to RBC. Sales of the newest phones don't show up until late 3Q/early 4Q meaning previous quarters didn't realize the full impact.
*Blackberry sales still at near record high of around 14m (quarter ended Nov 2011) with the lowest future forecast of 11 million (quarterly) being only about 25% lower than the record high for a quarter (meaning when bb10 comes to market sales are guaranteed to break into new record territory).
*9.2% of all handheld devices in the United States ranked top 4 ahead of Nokia, Motorola (25% of all mobile sales are smartphones)
*18.9% of all subscribers in terms of platform (study by comScore, quarter ended September 2011), Continues to have a piece of the tablet market (only 1% or 150,000 units shipped/160,000 sold last quarter however with the tablet market growing by 42% to 29 million in 2012 holding onto that 1% could mean higher playbook sales). Worldwide tablet sales increasing to as much as 253 million in 2016. The iPad2 is expected to dominate in 2012 with market share estimates ranging from 69% to as high as 90% (the rest residing mostly with Android devices like Amazon's kindle fire). Sales of RIM's playbook have been lackluster not because of a lack of interest from end users but rather because the big three American retailers Sprint, AT&T and Verizon Wireless have yet to carry it, they say the market for tablets is currently too crowded and RIM will have to wait. That has forced RIM to bear the burden of sales and marketing.

*In the three months beginning 2011 64% of RIM's revenue came from outside the US ($3.6B out of $5.6B) so a hit in its US market share doesn't mean nearly as much for RIM as it did for PALM (another reason the comparison is nonsensical). Sales of Bold 9870, Curve 3G make up a healthy fraction of total sales signifying that the high end market in emerging economies is growing.

*As an investor you have to be excited about the $1.1 billion cash on hand and zero total debt. That's basically the same position it was in a year earlier, on November 26, 2011 when the stock was 4.3X higher at $59.20/share (cash was only $300m higher at $1.435b) and its cash isn't necessarily in a downtrend; between the 2nd and 3rd quarters of 2012 fiscal year (Feb->Feb) cash on hand was up 32%. At $13 a share even the most pessimistic observers have to be somewhat curious about the company considering the sum of its parts could be as high as $15-$18/share. You also have to take into consideration the P/E ratio which is remarkably low for a company in an industry where P/E ratio's average around 16X. Neither Motorola Mobility or Nokia have reported any profit for the past couple quarters though their P/E ratios remain seven times higher than RIM's.

*Blackberry has over 75 million subscribers!!!! 35% more than it did a year ago. Its p/e ratio rock bottom at 3.90 is especially ridiculously low when you compare it to Nokia (20.48) and Motorola (20.52); it suggests that RIM has fallen far behind those companies when in fact the opposite is true; it has maintained market share and popularity (and even some earnings) despite not turning to other platform providers (specifically android and windows) when the going gets tough.
Net earnings at $256m in the three months ended November 2011, that's down from $911.11m the previous year (though sales are stable) but remember all smartphone markers are suffering in the earnings department due to profit margins being squeezed industrywide (carriers like US Cellular have rejected the iPhone4 because of profitability issues). RIM is still reporting hundreds of millions of dollars in earnings, in stark contrast to Nokia which has been operating at a loss for over half a year (-68M, -368M profit in the last two quarters respectively). During the 2011 year BlackBerry was one of only three operating systems to gain overall US market share in the mobile device category, what's more during the last month of the year it was the only one of those three (iOS, Android, BBX) to increase its share.

*In Indonesia, the world's 4th most populous nation, Blackberry remains the most popular smartphone brand with an impressive 6 million users. What's even more exciting is that high end models such as the $540 Bold 9790 'Bellagio', are gaining popularity.

Now on to QNX Blackberry 10 smartphone technology (QNX operating system, QNX technology also known as Neutrino)
*Probable that 1st QNX phones will have their own native e-mail since playbook is getting its own native BES compliant e-mail just before Colt launch.
*Next generation phones also compliant with Android apps making the apps difference (6X more at Android than RIM apps world) irrelevant.
*QNX phones will have a more fluid touch screen than even the iphone due to the application of leading edge technology (with better screen resolution). The Liquid Graphics technology utilized in the Java-based blackberry 7 already gives it seamless zooming and scrolling.
*Thinner than the iPhone, same resolution as the tablet (1024 x 600), similar resolution to the iPhone4S (16/9).

key rim stats (Dec.22 data)

* Share Price: 13.50/share (reached $14/share by the end of Friday Dec.23)
* Book Value: 19.45/share
* Cash on hand: 2.49/share
* Analyst EPS Growth Consensus: -2.61%
* Debt: No Debt
Grmike's advice - Even in liquidation mode the company is not overvalued with its intangible patents (worth as much as $5B), QNX division ($2-3B) and other assets including current assets (cash over $1B). At this point it has to be considered a value stock with high reward/little risk. Considering it still has a growing market share internatinally (30%) and that developing economies are adding millions of people yearly to their middle class (Brazil especially with nearly 20 million added last year) the RIM brand could be in for an upswing even though the US market countinues to be a hostile place for it. The smartphone and tablet market is growing in size at a rapid pace and that makes any amount of market share increasingly valuable. Look for trends in call options, when they pick up don't hesitate to buy a couple. The risk is minimal with share price so low but the reward is high and there are many cases in which a high reward would be realized. Don't underestimate the interest RIM garners as a takeover target now that Motorola is off the market, Nokia is expensive, isn't commited to developing its own independent operating system (Symbian has all but been abandoned in favour of Microsoft), is unprofitable and has no tablet. I think it's very telling that one of Research in Motion's biggest investors to date has been Jaguar Financial, a group whose sole purpose is to "invest in underperforming, undervalued or unappreciated companies".

General Commentary - China recently surpassed the US as the biggest smartphone market in terms of unit shipments (not revenue though) and Nokia still leads there (but with rapidly declining share) meaning that there's an opportunity for RIM to capitalize (if Android's Samsung, LG don't take it). Apple's still experiencing problems in Europe (not as bad as Nokia which got its share cut in half in 2011) with the iOS getting dangerously close to 20% in France and Germany meaning it recorded negative 5-10% growth over the last year, the opposite of what's been happening with Android. In Germany, Android holds 3X the market share of Apple which means a lot since Germany is Europe's biggest market. Germany has been a hostile place for Apple (just look up the patent ruling in favor of Motorola) so it could be a while before Apple makes up any of the share losses.
All is not lost for Apple abroad though. The iOS is still at over 30% in the UK (only European country that's over 30%), Japan (38%), Australia (41% and growing) and of course the United States (36% and growing). South Korea is Android dominant (85% share) while Nokia/Symbian still lead in China and Brazil but Nokia is losing market share fast as it transitions out of Symbian and over to Windows.

other info
71.1% of mobile subscribers in the United States used the text messaging services (September, up from 69.6% in June) and 31.1% of them accessed blogs/social networks (up from 29.1%).

Wednesday, December 7, 2011

Meg Energy Oil Exploration Update (double production to 65,000 by 2013, 260,000 b/d in 2020, Surmont 2018, phase 3)

    Meg Energy is one of Canada's largest oil exploration companies that owns 100% of a 3.7 billion barrel, 80 block section of Christina Lake, one of Canada's largest oil megaprojects (development began in 2008). In the first nine months of 2011 the company produced 25,450 bbls/d up 33.4% from 19,071 b/d in the corresponding period of 2010, but only 20,945 in 3q11 due to maintenance activity (versus 19,339 b/d in 3q10, all production comes from Christina Lake). Production and revenue recorded record highs in the second quarter of 2011, at 27,826 b/d and $279m respectively. Production is forecast to reach 29-31,000 b/d by the end of 2011 attributable to new equipment being installed at Christina Lakes' second phase expansion (when construction work there is completed in 2013 (operating at 100% compared to less than 30% currently) operations there will bring in an additional 35,000 b/d, more than doubling current production possibly to as high as 65,000 b/d). C$500 million of the C$1.4 billion in total project costs needed by phase 2B has already been spent with the balance coming in 2012. The company has only been producing since the last quarter of 2009 when output was 2,427 b/d.

MEG Energy has $937 million to spend next year on growth projects (which represents 70% of its $1.37B 2012 capex) the majority of which has already been allocated to phase 2B with the rest ($1-200m) going to the 3rd phase (initial construction), the exact amount to be determined pending a key regulatory decision in 1H2012 (3rd phase is key since it will add 150,000 b/d). There's also Surmont that should be coming online close to 2018 (Surmont has vast resources of heavy oil but very little of it represents upgraded reserves). MEG capital expenditure was $243.218 million in the July-September period (2011) compared to only $96.561m in 3q 2010. Maintenance costs and more money going to growth projects increased long term debt which is now at $1.792b up from 1.005b in 3q10. The last phase isn't expected to be completed until 2015-2020 and so the maximum 260,000 b/d estimate probably won't be reached until the latter part of that period.

The steam required to melt bitumen so that it can be brought to the surface by the process known as steam assisted gravity drainage, is produced at a power plant that doubles as a cogeneration plant which allows the company to turn excess steam into power able to be sold to the Alberta Power Grid (the extra money helps reduce operating costs ----> which increases operating netback). Western Canadian Select price is lower than WTI because it is a mixture of heavier oils/bitumen and synthetic oil and thus produces fewer barrels of oil per metric ton (prior to processing). Production costs per barrel were down significantly in the nine month period to $16.38 from $22.81 due to higher production volumes and Christina Lake producing at a normal phase (not ramp up phase as in 2010). Revenue from extra power sold to Alberta power grid (cogeneration plants) reduced net operating costs down to $11.95 from $18.63/bbl. In the 3rd quarter Meg received enough compensation from sold power to pay down per barrel operating costs by $5.13 ($4.43/b in the nine month period), that's up significantly from $2.13/bbl in the 3q10 ($4.18 in 9m10).

According to the company, its 1.9 billion barrels of 2P reserves are worth $12.1B, there's also another 1.8 billion barrels of inferred resource worth $7.0b (the company's market cap is under $9B). Christina Lake covers a large area, Cenovus Energy and ConocoPhillips already operate a large scale, synthetic oil project there that produces under 30,000 b/d that's also undergoing expansion (they tap into the McMurray Formation). The project is within the well known Athabasca Oil Sands of central-east Alberta.

Approximately 20% of Alberta's oil sands are close enough to the surface to be recovered by open pit mining, the rest requires vairous in-situ technologies. Alberta's royalty rates on oil production have fallen from an avg of $3/bbl to $2/bbl over the last decade and that has made it an even more attractive place to produce. Oil sands can be over five times more expensive to produce than conventional however with oil prices up more than 400% since 2001 that barrier to investment is becoming less of an issue (if the price of oil remains at or over $60/bbl which makes oil sands production economically viable, Alberta's oil production could reach as high as 11M bbls/d by 2045). Reason that heavy oil commands a lower price on the open market than WTI? You need 1.7 barrels per metric ton more of the <10 degree API heavy oil versus lighter oil because its high specific gravity (density as compared to a reference) makes its API gravity lower leading to fewer barrels produced according to this calculation. In the first nine months of 2011 the price of WTI oil was up 23.0% to $95.48/bbl from $77.65/bbl ($89.76 in the 3q11).

Sunday, November 27, 2011

Gold Prices, Eurozone Bond Sales (commodities weaker on strong US dollar, market selloff but long term fundamentals remain strong, Italy bond rates double in just one month)

Interesting Fact: 12% of the world's gold is produced at mines dug by individuals without advanced digging equipment. A lot of those mines are in countries like Mali and Somalia.
So far in 2011 silver's popularity has gone up while gold's has decreased slightly, at least according to sales reports by the US Mint. Between January and end of November 2011 the US Mint sold 37,859,500 ounces of silver (up 15.11% from 32,890,500 oz in 2010) and 934,500 ounces of gold (down 19.5% from 1,160,500 oz in 2010). In fact on October 1st it was rumoured that upwards of 737 thousand of silver ounces were purchased from the US mint, a one day record. If true that would amount to 42% of all silver purchased during the month of December 2010 and 24% of the three million ounces sold in October. Since the US moved towards a weak dollar policy in 2002 silver has tacked on about 500% of its present value which is still about 20% under its 200 day average. 2012 update France's credit rating was lowered to AA from AAA by Standard and Poor's. That's a bad position for the country to be in considering it recorded zero gdp growth during the year and given previous statements by Sarkozy as recently as October when he said he would do everything he could to keep France from being downgraded.

Negative Forces affecting the metals
     Over the last little while, particularly the last two weeks gold, silver and other iso traded precious metals showed vulnerability even though their long term outlook remains strong. The weaker prices are due in part to a stronger US dollar (equity markets weak driven lower by the strong dollar which negatively affects foreign investment, EU sovereign debt uncertainty causes US dollar to gain). The ECB's reluctance to purchase the soveriegn debt of Italy and Spain has also been a negative factor (ECB has been under pressure from Germany to refrain from handing out blank cheques to debt laden countries citing the repercussions and how greater ECB exposure to Italy would mean more exposure for Germany, France has a different opinion and is lobbying the ECB for more support). France thinks that more ECB buying is the only way to encourage other investors to buy sovereign debt; On Friday, 10-year Italian bond yields surpassed 7% after the country's debt auctions that day showed lackluster results (Italy did sell €8B worth of 1/2 yr bonds (@ 6.5%) & another €2B in 2 year bonds (@7.8%) however the rates commanded by buyers nearly doubled from only a month ago (was 4.63% and 3.54% respectively). 7% yields in Italy puts it in the same class Greece, Ireland and Portugal were once in (though rates did get much higher for those countries before their financial collapse, the 7% rate was seen as a point of no return), this is extremely dangerous because Italy is home to the world's 3rd largest bond market after the USA and Japan (worldwide exposure to Itay is 3 times what it was to Greece) with Barclays calling Italy's situation "mathematically beyond the point of no return".
Even more disconcerting: Germany, considered the strongest of the EU economies (more manageable debt/high gdp growth) is having problems raising money in the bond market; On Wednesday Nov. 23rd Germany sold only 60% of the 10-year bonds made available. Update: With Italy's debt crisis worsening and the ECB not stepping up with more support, the IMF is reportedly preparing to loan the country $794 billion (€400-€500 billion) at an interest rate of between 4% and 5%. The loan would allow the country 1-1.5 years to reform its system and hopefully regain its solvency. It must be noted however that the IMF may be relying on a new credit facility worth just over €420 billion that was offered it in 2009 by 39 countries, to put together the money for Italy given that only two months ago the IMF only had less than €300 billion available to be loaned. (wsj:IMF Can't Rescue Europe Alone) The news pushed European Equities higher (main equities index up 3.75% on Monday). (news broke in Italy's La Stampa)

There's also bad news coming out of China - Many companies are laying off workers in the manufacturing sector and that's leading to strikes in cities like Dongguan and Shenzhen. Less import demand by Europe is causing a decline in export growth (down to 16% in October). Many of the plants use commodities like gold (1,000 people left their positions in protest recently at apple/ibm plants in Shenzhen) and silver (Foxconn makes electronic components, automotive plants - cars require catalytic converters which are the largest source of demand for platinum group metals).

Grmike's view The commodities market is entering a consolidation and deflationary period as a result of the current US debt ceiling being capped until 2013, US dollar rally, and gold and silver's post 2008 rally. The gold to silver ratio is getting very close to 60 which represents a doubling in eight months (33 in April 2011). Central banks continue not surprising since silver and gold remain fundamentally strong investments. View the lower prices as an opportunity to buy more. Poor debt sale showings in Italy, Germany and Spain mean debt may literally be insurmountable. The effect that will have on currencies will be disastrous and that will cause central banks to hoard even more gold and silver making the commodities invaluable.

What about emerging market debt? The debt crisis is making the buying of debt associated with developed nations increasingly unpopular particularly amongst international investors. So where are they going? Well, a viable alternative for the long term that's attracting interest are emerging market bonds that is, emerging market debt denominated in their local currency (debt sales in the developing world traditionally happen this way). Even a year ago when the debt crisis wasn't as widespread, US pension funds forecast their participation at over $100 billion before 2015. The only limiting factor is that in many countries including the big players China, Brazil and India the system is designed to limit foreign capital investment so not all foreign investment is allowed and when it is some countries like Brazil impose a special tax. Though still in its early stages, restrictions on them are gradually being removed and that's leading to more investment.

Last Monday's 2.5% dip in gold put the spot price below its $1,700/oz 100 day moving average, possibly an important breach considering that level had been supported for over a month (December futures contract on Comex down to $1,685.7/oz). In the week of Nov 21-26 gold fell 2.3% after falling 3.5% the prevous week. So far for November, silver declined in price by nearly 10% meaning that on the year silver hasn't gained anything. Out of all the metals with an iso trading code palladium lost the most on the week, dropping 5.9% to close at $572/oz.

Positive forces on the metals:
Gold ETF's continue hoarding, with the total weight of all gold held by ETF's recently reaching a new high of 69.978 million ounces led by the world's largest, SPDR Gold Trust.

Friday, November 18, 2011

Eldorado Gold & European Goldfields, Low natural gas price affects production, What happened to Canadian oil company dividends? (no more trusts)

European Goldfields (% chg 5d, 1mo, 3mo, 6mo: -7.93% +29.54% -0.34% +26.5%) - updated as of December 19, 2011
Shares are currently trading above the 200 day moving average (in stark contrast to just a month ago-Nov 18 when they were below it).
For 9 of the last 11 months the stock has suffered (down about 29% until the last month when it showed some resilience, including last month's 18.4% increase the stock is still down 16% last 11 months) due to a longer than anticipated permit review process in which Greece decided whether or not to grant approval for the Olympias and Skouries gold-copper porphyry projects in northeastern Greece (permit initially applied for in 2006) (even after decided the stock continued to fall slightly, down 13% in the 3 months leading to mid November). Skouries alone has the potential to produce at a rate of 350,000 ounces of gold equivalent (about half of that coming from silver). The company took a while even just to make up the 9% stock decline experienced over the two months leading up to the decision (July 12, 2011). Base metals like copper continue their lacklustre showing ($4 August 22, 2011 compared to $4.45 on July 29th) making the copper assets less attractive. Dec.14 after takeover rumous subsided European Goldfields stock fell 8.8% on the day.

The two new permits take away a lot of the risk that scared investors away from the company. Including projects in Turkey and Romania, European Goldfields appears to be well on its way to becoming Europe's largest gold producer by 2013-2014 (over 400,000 ounces of pure gold/yr doesn't include silver and copper). Construction of the mines also won't be a problem with Greece's largest construction company, Ellaktor as its largest shareholder (19.36%), 2nd largest shareholder is Blackrock Investment at 7.3%. More reason to optimistic about the company outlook: takeovers! Eldorado Gold and Centerra Gold both operate projects in some of the same areas and would probably overpay in a takeover. Also, European Goldfields is considering a move to the main London Stock Exchange index moving up from junior AIM. In mid December 2011 there was a run on European Goldfields stock due to hints at a possible Centerra Gold takeover.
Also of note, first production at Olympias will be in 2012 & the company's only source of cash flow currently is a small mine in Stratoni, Greece.

European Goldfields acquired by Eldorado Gold Sunday December 18, 2011 for $2.5B. The new Eldorado Gold will have a market value of about $11 billion and produce 1.5 million ounces of gold by 2015. Shareholders of European Goldfields will receive 0.85 Eldorado shares and C$0.0001 in cash; The price being paid by Eldorado for EGF is about $13.05/share which is a 46.14% premium to the stock's month low of $8.95 reached on November 23, 2011. The deal comes at the same time the company is securing $600M from Qatar Holdings to finance the Skouries and Olympias projects in Stratoni Greece. The following day, on Monday Eldorado Gold pledged to spend $2 billion and create 2000 jobs in Greece over the next several years. Although Eldorado saw total cash operating costs per ounce go up $55 or 13.3% (9mo) owing to lower grade ore mined at Kinsladag (still the largest mine by output but ore grade is less than 1/4 as high as it is at the other mines), there were no negative effects felt on the company's income statement as the price of gold skyrocketed over the year, giving the company a 31% (9 months) and 38% (3rd qtr) boost in price realization per ounce to $1571 & $1700/oz respectively.

Natural Gas & Oil
    Since oil's near term rebound from below $80 back up to the $100 level (last 2 times oil breached that level: Feb 2011 & Oct 2008) many Canadian producers haven't added to their dividends. The reason? Ever since the end of the 2010 fiscal year the majority no longer enjoy the tax free incentive that came with being a trust in Canada, due to new government legislation doing away with the tax benefits (consequently many including Baytex, Vermilion, Provident, Penn West have since converted back into corporations). Although this may cause investors to lose interest it may not be bad for companies in the long run; More profit will be reinvested back into the company through expansionary efforts (they may see tax benefits to that). Berkshire Hathaway, for example pays no dividend even though it owns many companies which do. Maybe they should look to Exxon Mobil for advice, one of the world's ten largest companies it avoided paying US taxes in 2009 (used tax shelter practices to send earnings overseas). Exxon was not alone, of the 1.3 million US corporations only 33% paid taxes in their home country between 1998 and 2005 (another strategy used is using losses from previous years against current gains).

On October 27, 2011 Canada's third largest oil company, Cenovus Energy reported on the third quarter. Overall production was steady however natural gas production was down by more than 10% qoq, a trend not disimilar from its peers in the industry. It also set a long term production target for natural gas at 400-500 mmcf/d which is only half the rate at which it produced gas when the company first split from Encana in 2009. The lower results have nothing to do with resource depletions; Cenovus has been diverting capital expenditure away from gas and into oil which isn't surprising given that oil prices have increased by more than 400% since 2001 while natural gas prices (incluenced by supply and demand particularly the center of US deliveries in Louisina/NYMEX) are near a 9 year low of $3.32/m3. Natural gas was as high as $16 in 2008, $6 in 2009. Even the little amount that has been invested into natural gas assets ($22m in the 3q compared to over $220m for Christina Lake/Foster Creek) was done with a focus on oil ($200m increase in natural gas cash flow due to the $22m capex, was reinvested in oil assets). 36 mmcf/d of gas producing assets were sold off between 3q10 and 3q11. Between 2006 and 2010 Chinese imports of natural gas increased 1500%.
More on Oil Supply and Demand (2011-2016)

Friday, November 11, 2011

Alberta's oil sands, TransCanada's Keystone pipeline xl & Enbridge's attempt to access China

    Keystone XL, struggling through the approval phase, aims to bring more of Canada's oil to the United States in an effort to reduce their dependency on Middle East oil by 75% by 2020.
Among other top sources, Mexico is an unsustainable source due to dwindling resources there while Saudi Arabia (number 2) is viewed as unstable due to its situation within the Middle East & participation in opec (opec has tried to influence the price of oil by capping production). TransCanada's $7 billion pipeline (proposed in 2008) would double Alberta's oil exports to the United States. The Keystone Pipelines lowers delivery costs (reliance on overseas shipping/the many smaller pipelines that would be needed in place of it). The pipeline would be the safest pipeline in use so risks associated with oil spills would be minimal. There has already been over 40 months of review including three (and a final) major environmental assessments and numerous public meetings. Even with that considered, US President Obama put a key decision on the matter on hold until after the 2012 elections, by ordering another environmental assessment. The sticking point appears to be the pipeline's proposed route through Sand Hills, Nebraska (Sand Hills covers the mid to western portion of the state and has been designated an ecoregion by the WWF with 85% of Sand Hills (1/4 of Nebraska) being intact natural habitat). However, other routes result in a longer pipeline track and that creates more risk according to TransCanada Corp, Canada's 4th largest petroleum company. Even if another route is chosen it is highly likely that it will still impact Nebraska given that eight of the 14 different routes affect the state (only 1 avoids the sensitive Ogallala aquifer but six reduce the mileage across Sand Hills). The pipeline project would immediately create 20,000 American jobs while giving oil refineries in Texas a much needed boost in raw supply. According to TransCanada president Russ Girling “This project is too important to the U.S. economy, the Canadian economy and the national interest of the United States for it not to proceed." The 1,700 mile Keystone Pipeline would carry 700,000 barrels of oil per day to six Texas refineries in Padd III (would reduce Canada's reliance on refineries in Padd II where a glut of supply has depressed the price of Western Canadian Select oil). The Keystone Pipeline isn't the only major North American project underway, there's also the 800,000 bpd Wrangler Pipeline (Enbridge & Enterprise Product Partners) that will pipe oil from Cushing OK to the Gulf Coast. Another company, Kinder Morgan already operates three pipelines between Canada and the United States. (USA Today: Obama delay of Canadian pipeline won't stop tar sands) Oil price is up 25% over the last month and a half (ending November 16) driven by tensions between Israel and Iran.
Update January 20, 2011 Obama rejected a permit for the Keystone Pipeline. In response, Stephen Harper threatened to give more support over to the other pipeline project Northern Gateway Pipelines which will take the oil to British Columbia then overseas to destinations in China. Canada is home to 90% of 2P oil reserves outside of OPEC nations. The irony behind it all is that the decision by Obama makes the US more dependent on oil from unstable sources (Venezuela, Saudi Arabia) while also making the US a less financially secure/more hostile place to do business for traditional allies like Canada.
Alberta is home to nearly 170 billion barrels of proven and probable oil reserves (much of it amongst easily processed oil sand) exceeded only by Saudi Arabia and Venezuela (AP:China eyes Canada oil, US's energy nest egg) In Alberta alone, more than 1.6 trillion barrels of oil in inferred resource isn't even included because extraction methods SAGD and THAI/CAPRI aren't able to bring it to the surface by economically viable means. However, considering only conventional sources, Canada has major sources outside Alberta (Saskatchewan and Newfoundland combined have about 1.4 times as much oil reserves as Alberta). (NEB - Energy Reports Canadian Energy Ovewview) Approximately 20% of Alberta's oil sands are close enough to the surface to be recovered by open pit mining, the rest requires vairous in-situ technologies; the government of Alberta requires that oil companies bring the land back to 'equivalent land capability' that is, restore it to a level that makes it useful to the community either as boreal forest (which was initially destroyed) or pasture for bison (though many companies have only restored a fraction of that, for example Syncrude Oil restored 22%). Oil sands operations have been approved to use about 360 million m3 of water from the Athabasca River (runs through the mining district, water source is a glacier over 1,200 km away), that's twice as much water used by the entire city of Calgary though less than 1% of the water from the river is used by the province and oil operations; 24 m3 of water is used to produce 1 m3 of synthetic oil (1 m3= 6.29 barrels of oil). As oil sands production grows, companies like Canadian Natural Resources (ranks behind a couple companies in terms of oilsands production, Suncor is 1st at 355,000 bpd in January 2012) are improvising in order to reduce their usage of water from the Athabasca river so they continue to remain below the limit; CNRL now separates water from solids more effectively by injecting carbon dioxide captured from its hydrogen plant into tailings lakes reducing the need for additional water. 90% of conventional oil reserves are controlled by state owned oil companies.

By 2045 oil sands will produce close to 11M bbls/d and that will continue for a century. Tar sands crude is over five times more expensive to extract than middle east oil however with oil prices up more than 400% since 2001 and Alberta continuing to charge one of the lowest royalty rates in the world (down from $3/bbl in 2001 to $2/bbl in 2009) there is much profit to be made. Many smaller Canadian companies lack the billions needed to extract the oil and that has created opportunity for foreign companies including Norway's Stat Oil which has shown a lot of interest (Statoil's licenses in Venezuela were revoked by Chavez and their core reserves in the North Sea are nearing depletion). Fort McMurray is at the epicenter of Alberta's oil boom.
With crude oil fetching higher prices in Asia, Canadian producers are also looking to other markets outside North America (nearly all Canadian oil (2M bbls/d) currently heads south, 2010). The supply chain has, more recently become overwhelmed in the United States due to the release of 30 million barrels of reserve oil onto the market Parkersburg News and already filled up pipelines and storage tanks. With China's interest in Canada growing, another major pipeline project has been proposed; The 728 mile (1,200 km), 575,000 bpd Northern Gateway Pipeline proposed by Enbridge (construction by 2015, Enbridge already operates the world's longest oil pipeline). The new pipeline system is composed of two pipelines, 1 designated for the import of natural gas condensate, the other to the export of crude oil from Edmonton to Kitimat BC. Currently 99% of Canada's oil goes to just one market and even within that market (USA) Canada isn't getting as much in return for its oil as it could be getting since 55% of that oil goes to an area in the north east known as PADD II where a glut of supply is keeping prices down on West Canadian Select. The pipeline is gaining the attention of politicians and oil companies eager to broaden their customer base. More on Oil Supply and Demand (2011-2016)

The US delaying a key decision in the Keystone Pipeline case can only hurt North America’s energy indepedence given that China wants to tap into Canada’s oil supply and Canadian companies like that because heavy oil commands higher prices in Asia (than it does in the United States or even Canada). The Northern Gateway Pipelines which would carry Alberta oil to Kitimat BC then be loaded onto tankers headed for Asia. No Keystone Pipeline means China would eventually take a larger share of Canada’s oil putting US supply at risk (Canada is the largest source of US oil, Canada is also one of only a handful of countries with production growth).

Ironically, environmentalists are both helping and hampering efforts to provide access for Asia; The oil pipelines face fierce opposition from environmentalists and Native Indian groups concerned over wildlife and possible oil spills (like what happened with Enbridge in Michigan in 2010); at the same time American environmental groups have opposed the oil sands on the grounds that it makes excessive use of water and increases greenhouse gas emissions.

Here's what Newt Gingrich has to say about the Keystone Rejection
The Iranians are practicing closing the straits of Hormuz, the Canadian prime minister has already said to the US president, if you don't want to build this pipeline to create 20,000 American jobs and bring oil through the United States to the largest refinery complex in the world, Houston, I want to put it straight west in Canada to Vancouver and ship the oil direct to China so you'll lose the jobs, you'll lose the throughput, you'll lose 30 or 40 years of work in Houston. The president cannot figure out, I'm using milder words here, utterly irrational to say I'm now going to veto a middle class tax cut to protect left wing environmental extremists in San Francisco so that we're going to kill American jobs, weaken American energy, make us more vulnerable to the Iranians and do so in a way that makes no sense to any normal, rational American.
 According to Alberta's 2012 budgetary report, total oil production will reach 3M bpd by 2014, 2.4M of that is from non-conventional sources like bitumen (bitumen royalties totalled $5.7B in 2011 will be $9.9B in 2014).  2011-2012: non-conventional oil production was at 1.78 million barrels per day.  Conventional oil production will be 500,000 bpd in 2013.  Provincial royalty revenue:  Bitumen contributed $5.7B of the $6.5B total which includes conventinal, in 2012, 30% higher than the $4.4B earned the year before.  Total will be around $12.2B in 2014.

Wednesday, November 9, 2011

More Industrial uses for Silver (photovoltaics, rfid), Gold Reserves Increase with Price

    Higher gold prices mean higher resources because lower cutoff grades become economically viable (producers can absorb higher production costs without sacrificing margins). Osisko Mining on November 7 raised its inferred resource estimate solely due to the higher market price of gold. Osisko said that @ $1,000/oz production was economically viable at an average grade of 0.72 g/t but @ $1,800/oz the lower cutoff grade results in a 103% increase for inferred resource (from 5.32M to 10.79M ounces grading 0.51g/t or 29% smaller than at $1,000). Osisko's 3Q production was up 172% for gold (to 73,814 oz) and 147% for silver (to over 40,000 oz) between quarters. At Centerra Gold the higher price of gold led to a five-fold increase in third quarter earnings per share (35c vs 7c) while its revenue was up 132% to $278.4 million. The 500% change in earnings came mostlly due to the change in gold price (avg realized up 37.8% to $1705/oz) since sales increased 68.5% to 163,283 ounces (3q).

As for silver, production has risen in response to higher prices. From 1990 to 2007 demand for silver exceeded mine production by more than 1.5 billion ounces (The Silver Institute) but since then, production has met demand (recycling also helps balance demand - about 250M ounces of silver is recycled every year with all silver used in photography contributing back to supply this way). About 15% of silver production comes as a by-product of gold mining so higher gold prices, even if silver doesn't follow suit, will automatically increase silver production. Over history 45 and 40 billion ounces of silver has been produced (42.62B up to 2004) compared to about 6 billion ounces of gold. (goldeagle.com:The World's Cumulative Gold and Silver Production)

According to the US Geological Survey in 2009 silver mine production totalled 697.6M ounces a 23.86% ten year growth (annual basis) at the same time the average price rose by a factor of 2.2 while total supplies amounted to 922.2m ounces. Between 2010 and 2020 it is estimated that production will increase by 100-150M ounces while industrial demand alone increases by more than 250M ounces so supply deficits could become a factor again in the near future even though higher prices are causing more companies to build new mines/initiate exploration even in areas that have high production costs. Most of the increase in demand for silver is coming from industry (in 2000 it accounted for 35% of total demand but by 2009 it was over 50%). In 2010 silver supplies increased 14.60% to 1.0568b ounces but mine production was only 2.45% higher (contributed 70% of supplies in 2010 compared to 77.9% the year before). Net government sales of silver was nearly tripled to 44.8m ounces. On the demand side, industrial applications demanded 20.7% more in 2010 than in 2009 (difference of 83.6m ounces).

Silver Uses
Silver is a highly conductive metal (without much oxidation) and that makes it popular for use in electronics.
- RFID technology used in id tags. The antenna portion of it that is scanned and read is where the silver is used. The antenna can be scanned up to 15 meters away. Each tag uses over 1% of a gram of silver however billions of the tags are produced every year so it adds up).
- Jewelry remains the second largest source of demand at 167m ounces (2010) which represents a 5% increase on the year.
- Photography including x-ray film (however demand is falling due to digital replacements). Demand fell by 8.3% in 2010 to 72.7m ounces accounting for only 6.885 of total demand.
- Silver Coins : 8-10% of demand and increasing with people looking to invest in precious metals and gold perhaps becoming too expensive for some (bars aren't included, there are about 700M ounces of silver in bar form (large bars) that's up from just over 200M ounces in 2009).
- Medical Equipment & products such as pacemakers. Coins and medals increased 22.3m ounces in 2010 to 101.3m ounces (up 28.23% on the year).
- Photovoltaics/Solar Panels : The mirrors are coated with silver (specifically the energy conducting silicon cells). With solar energy use growing both in Europe/America & China greater demand from this sector is a sure thing.

Friday, November 4, 2011

29 too big to fail banks forced to raise cash ratio, Groupon GRPN joins Nasdaq, Unemployment lower in US but higher in Canada

Global banking regulator The Financial Stability Board on Friday November 4, 2011 released a list of 29 banks deemed "too big to fail", 8 of which are US based. Those making the list will be addressed directly by new global banking rules imposed by the G20 that will force banks to increase their cash so as to bring their cash reserves/loan ratio to a more appropriate level. The FSB is headed by bank of Canada governor Mark Carney (though none of Canada's banks made the FSB's list, appointment of Mark Carney comes at the same time Canada PM says no to European bailout support).
Dec.15 update: Fitch Ratings, a subsidiary of Paris based Fitch Group (1 of 3 credit rating agencies recognized by the US Exchange Commission (next to S&P and Moody's), downgraded 8 of the 29 banks viability ratings (the banks are dubbed GTUB's (global trading and universal banks). The banks are Bank of America, UBS, Credit Suisse, Morgan Stanley, Barclays, BNP Paribas, Goldman Sachs and Societe Generale. According to Fitch the bank's "business models are particularly sensitive to the increased challenges the financial markets face". Even though Fitch "incorporated the significant progress it sees the banks have made in building up capital and liquidity buffers to resist market challenges" it still downgraded them by one or two notches. According to Fitch "the structural aspects of their funding, earnings, and leverage, predispose GTUBs to vulnerability to market sentiment and confidence, particularly during periods of exogenous financial stress". BNP Paribas, the largest of the European banks, was also downgraded by Moody's to Aa3 on Dec.9.

The criteria required to make the list of 29 banks?
-must have exposure to more than just a couple economic sectors
-sizeable enough so that any threat posed to them will have widespread implications for the economy as a whole, that makes them eligible for government support which lowers any associated risk.
... more specifically
Financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. To avoid this outcome, authorities have all too frequently had no choice but to forestall the failure of such institutions through public solvency support. As underscored by this crisis, this has deleterious consequences for private incentives and for public finances.
Key definition - Loan Loss Reserves: A valuation of the good collateral a financial institution has on hand to cover bad or slow paying loans. The total value of the reserves changes with every charge-off (a loan that fails to meet its obligations - bank abandons collecting on it - it is no longer an earning asset). The provision for loan losses is an amount/allowance set aside (quarterly or annually) to boost loan loss reserves when they get too low. Note: some charge offs do recover (recovery rate), when they do they are added back to reserves. More on the world's largest banks here

Grmike's advice
-In the 4th quarter of 2011 tred cautiously with your investments in the banking sector; European Stability Fund bonds are not attracting as much investment as anticipated and banks, particularly European ones remain highly exposed. Obama says he's concerned about the debt problem.
-Invest in technology - The sector is still booming (Samsung - Galaxy smartphone, HTC new products are attracting a lot of attention) and Research In Motion countinues to be severely undervalued (Earnings to price ratio only 5.47 despite the company still having solid market share for operating systems & handheld devices as well as a growing list of subscribers (earnings may be lower but they have literally reached nil at Nokia and fell 42% for google between the last two quarters).
-Nordstrom (designer apparel) remains solid in terms of same store sales/growth, an indication that high end consumers are still shopping (in contrast with the low end where margins are being sqeezed).
-Don't forget about Bombardier - The producer of light rail/subway cars and most importantly small and large jets (most popular are the challenger and global families (combined produced 50 in the first half of 2011) but the aerospace division is most known for its Learjets (sold 19 last six months)). July backlog was $23B up 20% since the end of 2010. The Learjet 85 (in development since 2008) already has 60 orders even though the first ones won't be delivered until 2013. What's most attractive about Bombardier's stock is that even with all the upside to the company (backlog, new jets reaching first flight, strong order in rail cars, increasing market share for business jets, revenue up 18.2% in the quarter ended July 2011, net income up 48.9% qoq) its price to earnings ratio is currently 8.30 (Nov.5,2011) lower than key competitors Boeing (13.03) and Embraer SA (10.84). In the last five months of 2011 88 rail cars are scheduled to be delivered to Bombay's tram system.More on Bombardier

in other news..
Groupon joins the Nasdaq as GRPN exactly 3 years after its founding in November 2008 - The IPO was $700M the highest for a web based company since Google's 2004 $1.7B ipo. During the day it increased the number of shares by 1/6th (5M) with each priced at $20. Over the trading session shares rose by about 30% and by the end of the trading day Groupon was valued at $12.8 billion or 2.27 times (113%) more than what Google tried to buy it for in December 2010.

October jobs numbers: The United States created 80,000 jobs bringing the unemployment rate down to 9.0% from 9.1%. Canada lost 54,000 jobs (CDN dollar down about one cent versus the greenback on the day on which the report was released/2.4% loss over the week). Also affecting Canadian metrics: Insurance company Sun Life reported a quarterly loss ($621M/$1.07 per share) for the first time since 2009, on Wednesday November 2, 2011. Manulife disappointing results continue (loss of $2.4B). All of the 54,000 jobs lost in Canada are full time jobs, it pushed the unemployment rate up to 7.3% from 7.1%. Prior to October, 291,000 jobs were created over the last year in Canda. Labour numbers for Canada here

South Korea's tourism industry is thriving, the number of tourists visiting the country is up 47% in just the last five years. That compares to the 10% increase experienced by China. Most of South Korea's tourists come from China.

Thursday, October 27, 2011

Euro zone leaders reach debt deal; Gold, Silver demand up/price up $100/oz on week

   In Brussels, European leaders alongside the IMF negotiated with the financial institutions that own Greek debt in the form of bonds. They struck a number of key agreements the main one being a reduction in the value of Greek bond debt by half (banks take on the 50% loss on the nominal value of those bonds) wiping out $100B worth of debt commitments, bringing debt to a more managable level (120% of GDP down from 160%). Some of the insurers affected such as France's Groupama (wrote 2 billion euro worth of CDS) could bear an even greater burden due to their issuance of credit default swaps (CDS contracts) which they'd have to honour if it's determined that a credit event has taken place (unlikely though given that the deal was not forced on either party). CDS contracts on Greek debt stand at $75 billion up 50% since 2009. To woo insurance companies, the EU made available to it a €30B+ credit. Also helping Greece; Government crackdown on corruption which could increase tax revenue by as much as €1.2B in 2011 (will force more businesses to collect taxes on sales).

Just because Greece was taken care of doesn't mean the European situtation has stabilized; Italian bond rates are currently at 6.5% (November 2011, was 5.867% on Oct 27) up from 4.6% in June 2011 meaning that Italy needs to raise €600 billion from private investors over the next three years just to finance its current debt level. In comparison, it was when the ten year Greek bond yield initially hit 8% that Greek debt became unmanageable. To deal with that problem the European Financial Stability Facility (EFSF) increased its available funds from €440 billion to €1.0 trillion euros (US$1.4 trillion) giving more security to Spain and Italy at least for the next couple years. Problems at the negotiating table remain an issue due to differences between Germany and France. News of the deal pushed the euro to a 7 week high against the US dollar ($1.42). Update: On November 3rd the yield on Greece's 2 year bond topped 100% for the first time.
2010 deficit to gdp ratio by country: UK: 10.4% (government debt is 80% of gdp), Spain 9.2% (Spain's unemployment rate suprassed 20% in 2010, total government debt to gdp ratio is 60%), France 7% (gov debt 81% of gdp), Italy 4.6% (gov debt 119% of gdp, austerity has included cutting back on public holidays). (CBC: TSX, loonie, soar on Europe crisis plan) The budget deficits in most of those countries is a direct result of deflation due to prices being too high/governments of the weak economies having no control over the currency (monetary policy). Also during the week, the EU approved another €130B bailout package.
Here is where Greece is coming from, Last year they had 800,000 civil servents collecting $48,000 annually in full pensions, those pensioners became eligible for that at age 52. New austerity measures are likey to impact those people significantly. European banks typically leverage about 80 times (debt used to acquire additional assets), that puts the EU in a more preciarious situation than the United States (40 times leverage). More info Buyers of Greek Bonds Choose only 1 of 4

Update - A new problem has since been acknowledged: The European Stability Fund is having a difficult time attracting investors. Canada has already said no to investment while China has "no concrete plans". The Fund recently delayed a €3B bond sale citing market conditions.

Gold is up again! Gold soared by 1.4% to $1,747.70 (after reaching a one month high of $1,728.11/oz, up half a percent before the day even began) as demand remains strong in China (high inflation, economic uncertainty, real estate bubble) and the rest of the world where many still view the EU's most recent deal as only a temporary fix that doesn't solve the root of the problem. SPDR Gold Shares added 16.645 tonnes over the last three sessions. Silver was up 5.77% or $1.80. There's also a temporary slowdown in demand from India (Diwali festival of lights festivities are ongoing; Diwali is a five day festival however the entire event including other festivities runs from the middle of October to the middle of November, most of its gold demand came in preparation for the festival) and Thailand (recovering from the worst floods in fifty years). In India, gold trades on the Multi Commodity Exchange (MCX) where the price is commonly listed per 10 grams. Indian gold demand was up 38% in the second quarter of 2011 and 29% in the last 12 months. Just to give you an idea of how unprecedented the price of gold is today; Over history, the last bull market high was $850/oz.


If, as many suggest, the People's Republic of China lets the RMB increase in value relative to the USD, that will weaken demand for gold in the short term as investors see the new exchange rate as a sign of economic stability but in the long run, the stronger RMB will increase Chinese demand for Gold due to its greater purchasing power. Also, a stronger RMB will raise Chinese import demand, indirectly increasing Gold demand from abroad too.
Platinum group metals increase Platinum was up 2.77% ($44.2/oz) by the end of the trading day Thursday to $1,641.4/oz. Platinum, used in everything from surgical equipment to white gold plating to catalytic converters, is produced at a rate of only 5-6M ounces a year (5-10% as much as gold). South Africa produces 80% of the world's platinum. Spot palladium up 2.78% to $665/oz reaching another one month high (also recorded one month high the day before). Palladium began the year around $799.5/oz but since then has dropped 20%, platinum began the year at around $1770/oz but has dropped 7.8% since.

Other Notes: In the July-September 2011 period the US economy grew 2.5% up from the 2.3% estimate.
Total EU-Canada (ex UK) trade is $50 billion (6% of total Canadian trade). News of the Greek debt deal boosted the exchange rates of a number of currencies against the American dollar however not versus the Chinese Yuan or Japan's Yen (Euro up 2% to US$1.42, Canadian dollar up 1.5 cents to above parity at US$101.02). Many non US currencies actually strengthened versus the euro and dollar (US & Cdn).
Sony buys out its partnership with Ericsson for $1.5B giving Sony complete control over its smartphone business, allowing it integrate more of its products and software. Ericsson will now be able to focus more on its wireless technologies. Total world debt represents about 5X total GNP.